Question

Assets
Current assets:
Cash			$       500,000
Marketable securities			100,000
Accounts receivable		$     2,450,000
Less: Allowance for bad debts		250,000	2,200,000
Inventory			5,400,000
Total current assets			$    8,200,000
Fixed assets:
Plant and equipment, original cost		$    31,300,000
Less: Accumulated depreciation		13,100,000
Net plant and equipment			18,200,000
Total assets			$ 26,400,000
Liabilities and Owners’ Equity
Current liabilities:
Accounts payable			$   5,800,000
Accrued expenses			1,850,000
Total current liabilities			$    7,650,000
Long-term financing
Bonds payable			$    6,250,000
Preferred stock			1,120,000
Common stock     Retained earnings	{ Common equity		6,230,000       5,150,000
Total common equity			11,380,000
Total long-term financing			18,750,000
Total liabilities and owners’ equity			$ 26,400,000

Figure 2                   Historical issue cost of debt and preferred stock

Security	Year of Issue	Amount	Yield
Bond	2013	$      1,250,000	8.1%
Bond	2014	2,800,000	8.8%
Bond	2016	2,200,000	9.3%
Preferred stock	2015	595,000	11.0%
Preferred stock	2017	525,000	12.5%

1. Determine the appropriate weights for each component in the capital structure: Use the amount of retained earnings (as part of common equity) provided. The percentage composition (weights) in the capital structure for bonds, preferred stock, and common equity should be based on the current capital structure long-term financing section as shown in Figure 1 (indicated as $18.75 million). Common equity will remain at the current weight throughout the case, and the combined tax rate is 25%.

I DO NOT KNOW HOW TO SOLVE WACC PROBLEM.

Answer 1

WACC cannot be calculated as the cost of equity is not given. By adding the weight of cost of Equity with the component of 2.91% calculated above, WACC can be estimated

(0.3333 * 0.063) + (0.0597 * 0.1170) = 0.0291 or 2.91%

Workings